Two neighboring homeowners, i = 1, 2, simultaneously choose how many hours li to spend maintaining a beautiful lawn. The average benefit per hour is 10 - Ii + Ii/2, and the (opportunity) cost per hour for each is 4. Homeowner i’s average benefit is increasing in the hours neighbor j spends on his own lawn because the appearance of one’s property depends in part on the beauty of the surrounding neighborhood.

a. Compute the Nash equilibrium.

b. Graph the best-response functions and indicate the Nash equilibrium on the graph.

c. On the graph, show how the equilibrium would change if the intercept of one of the neighbor’s average benefit functions fell from 10 to some smaller number.

Answer rating: 100% (QA)

Step 1 Two neighboring homeowners simultaneously choosing about the number ofhours l i they need to ... View the full answer